The accompanying notes are an integral part of these condensed
financial statements.
The accompanying notes are an integral part of these condensed
financial statements.
NOTES TO THE FINANCIAL STATEMENTS
Years Ended October 31, 2020 and 2019
1.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Nature of Operations -
Innovative Designs, Inc. (the “Company”), which was incorporated in the State of Delaware on June 25, 2002, markets
cold weather recreational and industrial clothing products, as well as house wrap, which are made from INSULTEX, a low density
foamed polyethylene, a material with buoyancy, scent block, and thermal resistant properties. Our clothing and housewrap is offered
and sold by retailers, distributors, and companies throughout the United States and Canada.
We operate two reportable
segments: Apparel and House Wrap. Our apparel segment offers a wide variety of extreme cold weather apparel and related items.
Our House Wrap segment offers our INSULTEX House Wrap which has an R-value of 3 and an R-value of 6 and our own seam tape.
Basis of Accounting -
The financial statements are prepared using the accrual basis of accounting in which revenues are recognized when earned and expenses
are recognized when incurred.
Fiscal Year End -
The Company’s fiscal year ends on October 31. The fiscal years ending October 31, 2020 and 2019 are referred to as 2020 and
2019, respectively, throughout the Company’s financial statements.
Estimates - The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect reported amounts and disclosures. Actual results may differ from
these estimates and assumptions.
Cash and Cash Equivalents -
The Company defines cash and cash equivalents as those highly liquid investments purchased with a maturity of three months or less.
Revenue Recognition -
The Company recognizes recognize revenue upon transfer of control of promised goods or services to customers in an amount that
reflects the consideration we expect to receive for those goods or services, including any variable consideration. Revenue is derived
from sales of the Company’s recreational products, such as Arctic Armor, and our house wrap line of products. Sales of these
items are recognized when the items are shipped. The Company offers a 5-day return policy and no warranty on all of its products.
All sales outside the United States are entered into using the U.S. dollar as its functional currency. During 2019, the Company
took back certain products from customers that accounted for $1,716 in revenue. The Company was not required to accept these returns
but made a business decision to do so.
Fair Value of Financial
Instruments - The carrying value of cash and cash equivalents, accounts receivable, accounts payable, and certain other
liabilities approximate their estimated fair values due to the short-term nature of these instruments. The fair value of the Company’s
debt instruments approximates their fair values as the interest is tied to or approximates market rates.
Estimated Uncollectable
Accounts - Management evaluates its receivables on a quarterly basis to assess the validity of remaining receivables.
Management has determined that there is significant doubt regarding the receivable balance over 90 days and applied an allowance
of $5,860 and $10,409, respectively, as of the fiscal year ended October 31, 2020 and 2019.
INNOVATIVE DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended October 31, 2020 and 2019
Inventory - Inventory
consists primarily of finished goods. Inventory is stated at the lower of cost or net realizable value and is valued based on first-in-first-out.
Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion,
disposal, and transportation.
During the fiscal year ended
October 31, 2010, the Company discontinued its hunting and swimming lines of apparel. A reserve balance of approximately $75,468
was recorded as of October 31, 2020 and 2019. The reserve is evaluated on a quarterly basis and adjusted accordingly.
Deposits on Inventory -
The Company only has one manufacturer that produces the apparel on behalf of the Company, located in Indonesia. The Company will
send deposits to the manufacturer for future production of the apparel based on approved purchase orders between the Company and
the manufacturer. Once finished purchase orders are received by the Company, the deposits associated with those purchase orders
are transferred into inventory. The Company had a on deposit for the INSULTEX in the amount of $57,330 as of October 31, 2020 and
2019.
Property and Equipment -
Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged to income as incurred. Additions,
improvements and major replacements are capitalized. The cost and accumulated depreciation related to assets sold or retired are
removed from the accounts and any gain or loss is credited or charged to income.
For financial reporting purposes,
depreciation is primarily provided on the straight-line method over the estimated useful lives of depreciable assets, which range
from 5 to 7 years.
Deposits on Equipment -
On July 12, 2015, the Company reached an agreement with Ketut Jaya to purchase the machinery and equipment utilized to produce
the INSULTEX material. The purchase price is $700,000 and to be made in four installments. The first installment of $300,000 is
to be made at the execution of the agreement. The second installment of $200,000 is to be made when the machinery and equipment
is ready to be shipped to the United States. The third installment of $100,000 is to be made once the machinery and equipment is
producing INSULTEX, and the fourth and final installment of $100,000 is to be made after the first commercial production run of
INSULTEX is completed. As of October 31, 2018, the Company has made payments of $500,000 in accordance with the agreement and made
a $100,000 pre-payment as the machine is not yet producing INSULTEX. During 2019, the Company determined the shipping costs of
$17,000 were impaired and these costs were written down. Deposits on Equipment as of October 31, 2020 and 2019 were $600,000 and
$617,000, respectively.
Impairment of Long-lived
Assets - Management of the Company considers the valuation and depreciation of property and equipment. Management considers
both the current and future levels of undiscounted cash flow generated by the Company and the continuing value of property and
equipment to determine when and if an impairment has occurred. Any write-downs due to impairment are charged to operations at the
time the impairment is identified. No such write-downs due to impairment have been recorded in 2020 and 2019 except as noted in
“Deposits on Equipment”.
Income Taxes -
The Company accounts for income taxes in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) Topic 740 “Income Taxes”, which requires an asset and liability approach for
financial reporting purposes. Deferred income taxes are provided for differences between the tax bases of assets and liabilities
and the financial reporting amounts at the end of the period, and for net operating loss and tax credit carryforwards available
to offset future taxable income. Changes in enacted tax rates or laws result in adjustments to recorded deferred tax assets and
liabilities in the periods in which the tax laws are enacted or tax rates are changed.
INNOVATIVE DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended October 31,
2020 and 2019
In addition, ASC 740 clarifies
the accounting for uncertainty in tax positions and requires that a company recognize in its financial statements the impact of
a tax position, only if it is more likely than not of being sustained upon examination, based on the technical merits of the position.
The Company recognized no material adjustments to the liability for unrecognized income tax benefits.
The Company’s policy
regarding the classification of interest and penalties recognized in accordance with ASC 740 is to classify them as income tax
expense in its financial statements, if applicable.
The Company is subject to
routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress.
Concentration of Credit
Risk - The Company maintains its cash and cash equivalents with a financial institution which management believes to be
of high credit quality. Their accounts are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 in coverage.
The balances in these accounts may, at times, exceed the federally insured limits. The Company has not experienced any losses on
the deposits and management believes the Company is not exposed to any significant credit risk related to these accounts. The Company
had no uninsured cash balances as of October 31, 2020 and 2019, respectively.
Shipping and Handling -
Shipping costs associated with acquiring inventories are charged to cost of goods sold when incurred. The Company pays shipping
and handling costs on behalf of customers for purchased merchandise. These costs are billed back to the customer through the billing
invoice and are included in revenue at the time the merchandise is shipped. The shipping and handling costs associated with customer
orders was $12,413 and $15,433 for the fiscal years ended October 31, 2020 and 2019, respectively.
Net Income Per Common
Share - The Company calculates net income per share in accordance with ASC Topic 260 “Earnings per Share”.
Basic earnings per share are calculated by dividing net income by the weighted average number of common shares outstanding for
the period. The Company only has common stock outstanding for 2020 and 2019. As a result, diluted earnings per share was not calculated.
Stock-Based Compensation -
The Company accounts for stock-based compensation in accordance with ASC Topic 718 “Compensation - Stock Compensation”.
In accordance with the provisions of ASC 718, share-based payment transactions with employees are measured based on the fair value
of the nonequity instruments issued on the grant date or on the fair value of the liabilities incurred. Share-based payments to
nonemployees are measured and recognized using the fair-value method, based on the fair value of the equity instruments issued
or the fair value of goods or services received, whichever is more reliably measured.
Recent Accounting Standards
Update – Recently, various new ASUs were issued by the FASB. Management has determined, based on their review, the
following ASUs issued recently that will be applicable to the Company. Management will continue to monitor the issuance of updates
throughout the year to determine if the update will have an impact on the Company’s financial statements and should it have
an impact, the update will be disclosed in the notes to the financial statements.
In February 2016, the FASB
issued ASU 2016-02, “Leases”, which added a requirement than an entity, when acting as a lessee, should recognize in
the balance sheet a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset
for the lease term. For public business entities, ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 including
interim periods within fiscal years beginning after December 15, 2019. Management has adopted the guidance as noted within Notes
3, 14, and 15 of the financial statements.
INNOVATIVE DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended October 31,
2020 and 2019
These financial statements have been prepared on a going concern basis, which implies that the Company will continue to realize
its assets and discharge its liabilities in the normal course of business. The Company had net losses of $280,743 and $520,591
and a negative cash flow from operations of $162,312 and $266,446 for the years ended October 31, 2020 and 2019, respectively.
In addition, the Company has an accumulated deficit of $9,730,028. These factors raise substantial doubt regarding the Company’s
ability to continue as a going concern for a period of one year from the issuance of these financial statements. Managements plans
include continued sales, sales of Company stock, and borrowings from private parties. These financial statements do not include
any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might
be necessary should the Company be unable to continue as a going concern.
3.
|
RIGHT OF USE ASSETS AND LEASE LIABILITIES
|
During the quarter ended April 30, 2019, the Company implemented Accounting Standards Update 2016-02, leases. Under the new guidance,
a lessee must be record a liability for lease payments (referred to as the lease liability) and an asset for the right to use the
leased asset during the lease term (referred to as the right of use asset) for all leases, regardless of whether they are designated
as finance or operating leases. This election requires the lessee to recognize lease expense on a straight-line basis over the
lease term. The right of use assets and corresponding right of use liabilities have been recorded using the present value of the
leases. See Notes 15 and 16 within the financial statement for additional disclosure on leases.
4.
|
PROPERTY AND EQUIPMENT
|
Property and equipment are summarized
by major classifications as follows:
|
|
2020
|
|
2019
|
|
|
|
|
|
Equipment
|
|
$
|
221,835
|
|
|
$
|
221,835
|
|
Containers
|
|
|
14,900
|
|
|
|
14,900
|
|
Furniture and fixtures
|
|
|
11,083
|
|
|
|
11,083
|
|
Leasehold improvements
|
|
|
4,806
|
|
|
|
4,806
|
|
Automobile
|
|
|
9,121
|
|
|
|
9,121
|
|
|
|
|
261,745
|
|
|
|
261,745
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation
|
|
|
196,558
|
|
|
|
163,250
|
|
|
|
|
|
|
|
|
|
|
Property and equipment – net
|
|
$
|
65,187
|
|
|
$
|
98,495
|
|
Depreciation expense for the fiscal years ended October 31, 2020 and 2019 was $33,308 and $33,037, respectively.
INNOVATIVE DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended October 31, 2020 and 2019
5. BORROWINGS
Borrowings at October
31, 2020 and 2019 consisted of the following:
|
|
2020
|
|
2019
|
Due to Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note Payable $8,000 - Roberta Riccelli, February 2012
|
|
|
|
|
|
|
|
|
Due June 17, 2012; interest is 10% for 120 days. Note was extended through a verbal agreement with no set maturity date.
|
|
$
|
3,000
|
|
|
$
|
3,000
|
|
|
|
|
|
|
|
|
|
|
Note Payable $20,000 - Corinthian Development,
|
|
|
|
|
|
|
|
|
January 15, 2013. Due May 15, 2013; payable on demand; interest is 10%; Note was extended through a verbal agreement with no set maturity date.
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
Note Payable $25,000 - Sol & Tina Waxman Family
|
|
|
|
|
|
|
|
|
Foundation, March 2015. Amended January 15, 2018 for $30,250; Due January 5, 2019; interest is 10%.
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Note Payable $90,000 - Joseph Riccelli, Sr., May 2013.
|
|
|
|
|
|
|
|
|
Due November 22, 2013; interest is 10% for 180 days. Note was extended through a verbal agreement with no set maturity date.
|
|
|
8,400
|
|
|
|
8,400
|
|
Note Payable $4,500 - Joseph Riccelli, Sr., August 2019.
|
|
|
|
|
|
|
|
|
Interest is 10% for 180 days; No set maturity date.
|
|
|
4,500
|
|
|
|
4,500
|
|
Note Payable $36,500 - Joseph Riccelli, Sr., September 2019.
|
|
|
|
|
|
|
|
|
Interest is 10% for 180 days; No set maturity date.
|
|
|
36,500
|
|
|
|
36,500
|
|
Note Payable $3,000 - Joseph Riccelli, Sr., October 2019.
|
|
|
|
|
|
|
|
|
Interest is 10% for 180 days; No set maturity date.
|
|
|
3,000
|
|
|
|
3,000
|
|
Note Payable $38,000 - Joseph Riccelli, Sr., December 2019. Interest is 10% for 180 days; No set maturity date.
|
|
|
4,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note Payable $50,000 - Lawrence Fraser, May 29, 2018.
|
|
|
|
|
|
|
|
|
Due June 1, 2019; interest is 10% annually. Note was extended through a verbal agreement with no set maturity date;
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Note Payable $40,672 - Riccelli Properties, August 7, 2017.
|
|
|
|
|
|
|
|
|
Due February 7, 2018; interest is 10%. Note was extended through a verbal agreement with no set maturity date
|
|
|
32,200
|
|
|
|
32,200
|
|
|
|
|
|
|
|
|
|
|
Total Due to Stockholders
|
|
$
|
102,200
|
|
|
$
|
96,100
|
|
INNOVATIVE DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended October 31, 2020 and 2019
|
|
2020
|
|
2019
|
Notes Payable
|
|
|
|
|
Note Payable – U.S. Small Business Administration.
|
|
|
|
|
|
|
|
|
PPP Loan proceeds received on May 5, 2020
|
|
|
33,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note Payable - U.S. Small Business Administration.
|
|
|
|
|
|
|
|
|
Due July 2035; payable in monthly installments of $1,820 including interest at 2.9% annum.
|
|
|
|
|
|
|
|
|
|
|
$
|
92,608
|
|
|
$
|
100,064
|
|
|
|
|
|
|
|
|
|
|
Total Borrowings
|
|
|
228,460
|
|
|
|
199,164
|
|
|
|
|
|
|
|
|
|
|
Less Due to Stockholders
|
|
|
102,200
|
|
|
|
99,100
|
|
|
|
|
|
|
|
|
|
|
Less Current Portion of Notes Payable
|
|
|
18,628
|
|
|
|
19,168
|
|
|
|
|
|
|
|
|
|
|
Total Long Term Portion of Notes Payable
|
|
$
|
107,632
|
|
|
$
|
80,896
|
|
Maturities of long-term
debt are as follows:
Year Ending
|
|
|
|
Notes
|
|
|
October 31
|
|
Stockholders
|
|
Payable
|
|
Amount Due
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
|
$
|
102,200
|
|
|
|
18,628
|
|
|
|
120,828
|
|
2022
|
|
|
|
|
|
|
|
19,739
|
|
|
|
19,739
|
|
2023
|
|
|
|
|
|
|
|
20,319
|
|
|
|
20,319
|
|
2024
|
|
|
|
|
|
|
|
20,916
|
|
|
|
20,916
|
|
2025 & thereafter
|
|
|
|
|
|
|
|
46,658
|
|
|
|
46,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
102,200
|
|
|
|
126,260
|
|
|
|
228,460
|
|
DUE TO STOCKHOLDERS
In February 2012, the Company
entered into a note payable with Roberta Riccelli for $8,000. This loan was to be used to fund operations of the Company. This
loan is due on demand, including interest at 10% for 120 days. This note was extended through a verbal agreement. The loan balance
as of October 31, 2020 and 2019 was $3,000.
In January 2013, the Company
entered into a note payable with Corinthian Development for $20,000. This loan was to be used to fund operations of the Company.
This loan is due on demand, including interest at 10% with an original repayment date of May 2013. This note was extended through
a verbal agreement. The loan balance at October 31, 2020 and 2019 was $10,000.
INNOVATIVE DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended October 31, 2020 and 2019
In May 2013, the Company
entered into a note payable with its CEO, Joseph Riccelli, for $90,000. This loan was to be used to fund operations of the Company.
This loan is due on demand, including interest at 10% with an original repayment date of November 2013. This note was extended
through a verbal agreement. The loan balance at October 31, 2020 and 2019 was $8,400.
During August 2017, the Company
entered into a note payable agreement with Riccelli Properties, which is wholly owned and operated by the Company’s CEO,
Joseph Riccelli, in the amount of $40,672. This amount reflects payments made by Riccelli Properties on the Small Business Association
promissory note. Riccelli Properties sold the real estate that was collateral on the promissory note. The note has a term of 6
months and an interest rate of 10%. This loan balance at October 31, 2020 and 2019 was $32,200.
In August 2019, the Company
entered into a note payable with its CEO, Joseph Riccelli, for $36,500. This loan was to be used to fund operations of the Company.
This loan has no set maturity date, including interest at 10%. The loan balance at October 31, 2020 and 2019 was $36,500.
In September 2019, the Company
entered into a note payable with its CEO, Joseph Riccelli, for $4,500. This loan was to be used to fund operations of the Company.
This loan has no set maturity date, including interest at 10%. The loan balance at October 31, 2020 and 2019 was $4,500.
In October 2019, the Company
entered into a note payable with its CEO, Joseph Riccelli, for $3,000. This loan was to be used to fund operations of the Company.
This loan is due on demand, including interest at 10% with an original repayment date of November 2013. This note was extended
through a verbal agreement. The loan balance at October 31, 2020 and 2018 was $3,000.
In December 2019, the Company
entered into a note payable with its CEO, Joseph Riccelli, for $38,000. This loan was to be used to fund operations of the Company.
This loan is due on demand, including interest at 10% with an original repayment date of November 2013. This note was extended
through a verbal agreement. The loan balance at October 31, 2020 was $4,600.
NOTES PAYABLE
In July 2005, the Company
was approved for a low interest promissory note from the U.S. Small Business Administration in the amount of $280,100. In January
2006 the Company amended the promissory note with the Small Business Administration increasing the principal balance to $430,500.
The note bears an annual interest rate of 2.9% and matures on July 13, 2035. Monthly payments, including principal and interest,
of $1,820 are due monthly. A payment was made on the note of $40,672 during the year ended October 31, 2017 due to the sale of
real estate by Riccelli Properties that was collateral on the promissory note. The loan balance was $92,608 and $100,064 at October
31, 2020 and 2019, respectively. This note is guaranteed by the Company’s CEO.
In May 2020, the Company
was approved for a PPP Loan from the U.S. Small Business Administration in the amount of $32,652. If the Company does not receive
forgiveness on the loan, it will be charged a 1% interest rate on the loan during the repayment period.
INNOVATIVE DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended October 31, 2020 and 2019
6. EXCLUSIVE LICENSING AND MANUFACTURING AGREEMENT
On April 16, 2006, the Company
entered into an Exclusive License and Manufacturing Agreement (the “Agreement”) with the Ketut Group, with an effective
date of April 1, 2006, whereby the Company acquired an exclusive license to develop, use, sell, manufacture and market products
related to or utilizing INSULTEX™, Korean Patent Number, (0426429) or any INSULTEX Technology. At the behest of the Board
of Directors, the INSULTEX trademark was chosen as the mark to identify the product utilized by Innovative since its inception
and was originally registered by Joseph Riccelli on February 17, 2005. The new trademark, intended to avoid confusion arising from
the use of the old Eliotex trademark in association with a new, subsequent, different and separately-patented product, was assigned
by Mr. Riccelli to the Company on April 25, 2006, with that assignment to become effective upon final approval of the Statement
of Use by the United States Patent and Trademark Office. The License was awarded by the Korean inventor, an individual who is part
of the Ketut Group, and the manufacturer of INSULTEX™. The Company received an exclusive forty (40) year worldwide license,
except for Korea and Japan, with an initial term of ten (10) years and an option to renew the License for up to three (3) successive
ten (10) year terms. The first ten-year option was exercised. Additionally, the Company was granted the exclusive rights to any
current or future inventions, improvements, discoveries, patent applications and letters of patent which the Ketut Group controls
or may control related to INSULTEX™. Furthermore, the Company has the right to rant sub-licenses to other manufacturers
for the use of INSULTEX™ or any INSULTEX Technology.
7.
CONCENTRATIONS
Revenues from three customers
were approximately 64% and 53% of the Company’s revenues for the fiscal years ended October 31, 2020 and 2019, respectively.
The Company only has one
supplier of INSULTEX, the special material which is manufactured within the apparel of the Company. Additionally, the Company only
has one manufacturer that produces the apparel on behalf of the Company, located in Indonesia, and one manufacturer that produces
house wrap on behalf of the Company in Massachusetts.
8.
INCOME TAXES
In prior years, the Company
incurred net operating losses and, accordingly, no provision for income taxes has been recorded. In addition, no benefit for income
taxes has been recorded due to the uncertainty of the realization of any tax assets. For the 2019 tax year, fiscal year end October
31, 2020, the Company had net operating loss carryforwards of approximately $7,100,000 for tax purposes. The carryforwards are
available to offset taxable income of future periods and begin to expire after the Company’s 2037 tax year, fiscal year end
October 31, 2038. Effective for tax years ending in 2019 or later, net operating losses cannot be carried back but can be carried
forward to future tax years indefinitely. Realization of the deferred tax benefit related to the carryforward is dependent upon
the Company generating sufficient taxable income in the future, against which the loss can be offset, which is not guaranteed.
Deferred income taxes reflect
the net tax effect of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes, as well as tax benefits of net operating loss carryforwards. The significant components
of the Company’s deferred tax assets and liabilities relate to the following:
INNOVATIVE DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended October 31, 2020 and 2019
|
|
2020
|
|
2019
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
2,063,193
|
|
|
$
|
2,011,532
|
|
Depreciation
|
|
|
|
|
|
|
—
|
|
Net deferred tax assets before valuation allowance
|
|
|
2,063,193
|
|
|
|
2,011,532
|
|
Less: Valuation allowance
|
|
|
(2,063,193
|
)
|
|
|
(2,011,532
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
For financial reporting purposes,
the Company has incurred losses in previous years. Based on the available objective evidence, including the Company’s previous
losses, management believes it is more likely than not that the net deferred tax assets will not be fully realizable. Accordingly,
the Company provided for a full valuation allowance against its net deferred tax assets as of October 31, 2020 and 2019, respectively.
The effective income tax rate varied from the
statutory Federal tax rate as follows:
|
|
2020
|
|
2019
|
|
|
|
|
|
Federal statutory rate
|
|
|
21
|
%
|
|
|
21
|
%
|
Effect of net operating losses
|
|
|
(21
|
%)
|
|
|
(21
|
%)
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
—
|
|
|
|
—
|
|
The Company’s effective
tax rate is lower than what would be expected if the federal statutory rate were applied to income (loss) before taxes, primarily
due to net operating loss carryforwards.
9. COMMITMENTS
The Company leases its executive
offices/warehouse space from Frank Riccelli, a stockholder and brother of our Chief Executive Officer, for $3,500 per month. The
lease is based on a verbal agreement with month to month terms. For the fiscal years ended October 31, 2020 and 2019 rent expense
totaled $27,000 and $42,000, respectively.
10. SEGMENT INFORMATION
We have organized our operations
into two segments as discussed in Note 1 to the financial statements. We rely on an internal management reporting process that
provides segment information for purposes of making financial decisions and allocating resources.
The following tables present
our business segment information for the fiscal years ending October 31, 2020 and 2019:
INNOVATIVE DESIGNS,
INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended October 31, 2020 and 2019
|
|
2020
|
|
2019
|
|
|
|
|
|
Revenues:
|
|
|
|
|
Apparel
|
|
$
|
70,968
|
|
|
$
|
135,506
|
|
Housewrap
|
|
|
131,285
|
|
|
|
80,469
|
|
Total Revenues
|
|
$
|
202,253
|
|
|
$
|
215,975
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures:
|
|
|
|
|
|
|
|
|
Apparel
|
|
$
|
|
|
|
$
|
—
|
|
Housewrap
|
|
|
|
|
|
|
—
|
|
Total
|
|
$
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Depreciation:
|
|
|
|
|
|
|
|
|
Apparel
|
|
$
|
9,410
|
|
|
$
|
9,410
|
|
Housewrap
|
|
|
23,898
|
|
|
|
23,627
|
|
Total
|
|
$
|
33,308
|
|
|
$
|
33,037
|
|
11. COMMON STOCK
During the fiscal year ended
October 31, 2019, the Company sold 1,867,000 shares of common stock to nine investors for total proceeds of $264,040. The stock
was issued between $0.08 and $0.17 per share. During the fiscal year ended October 31,2019, 550,000 shares of common stock were
issued to one note holder for the extinguishment of a $50,000 note payable and $5,000 of accrued interest. This stock was issued
at $0.10 per share. The Company issued 210,000 shares of common stock to three individuals for services valued at $35,500. The
stock was issued between $0.15 and $0.20 per share. We believe that Section 4(2) of the Securities Act of 1933, as amended, was
available because these transactions did not involve a public offering and there was no general solicitation or general advertising
involved in these transactions. We placed legends on the stock certificates stating that the securities were not registered under
the Securities Act and set for the restrictions on their transferability and sale.
During the fiscal year ended
October 31, 2020, the Company sold 950,000 shares of common stock to ten investors for total proceeds of $143,500. The stock was
issued between $0.10 and $0.20 per share. The Company issued 150,000 shares of common stock to one individual for services valued
at $27,000. The stock was issued at $0.18 per share. We believe that Section 4(2) of the Securities Act of 1933, as amended, was
available because these transactions did not involve a public offering and there was no general solicitation or general advertising
involved in these transactions. We placed legends on the stock certificates stating that the securities were not registered under
the Securities Act and set for the restrictions on their transferability and sale.
INNOVATIVE
DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended October 31, 2020 and 2019
12.
RELATED PARTY TRANSACTIONS
The Company has entered into
various debt agreements with related parties. These agreements are classified as shareholder loans within Note 8 to the financial
statements.
The Company has entered into
a verbal lease agreement as further discussed in Note 9 to the financial statements.
13. LITIGATION
On November 4, 2016,
the FTC filed a complaint against the Company in the U.S. District Court Western District of Pennsylvania, Case number 16-1669.
In the complaint, the FTC alleges that, among other matters, the Company did not have substantiation of claims made by the Company
regarding the R value and energy efficiency of its INSULTEX House Wrap products. The complaint asks as to redress a rescission
of revenue the Company received from the sale of House Wrap and a permanent injunction. On September 24, 2020, a judgment
was entered in favor of the Company as to all claims set forth in the FTC complaint. It was further ordered that as there were
no remaining claims in the action the case shall be marked as closed.
On
November 23, 2020, the Company was informed that the FTC had filed a notice of appeal in regard to the case. The appeal is from
the District Court’s September 24, 2020, Order granting the Company’s Motion for Judgment on Partial Findings Pursuant
to Fed. R. Civ. P. 52(c) and subsequent Judgment in favor of the Company and from the District Court’s February 14, 2020,
striking Dr. David Yarbrough’s expert testimony made on behalf of the FTC. The FTC filed its appeal and on March 24, 2021,
the Company filed its answer.
On July 22, 2021, the Registrant was informed that the United States Court of Appeals for the Third District
affirmed the District Court’s ruling in favor of the Registrant. The ruling was in connection with the Federal Trade Commission
complaint filed against the Registrant in November 2016, alleging, among other matters, that the Registrant did not have substantiation
for claims made by the Registrant regarding the R-value and energy efficiency of its INSULTIX House Wrap products.
14. RIGHT
OF USE ASSETS
The Company entered into
a month to month verbal lease at the time the Company was formed that is classified as right of use asset and lease liability.
The lease for the Company’s office space is estimated to be through June 2022. In accordance with ASU 2016-02, the Company
calculated the present value of the leases using the average commercial real estate interest rate of 5.50% at the commencement
of the office lease. Applying the commercial rate, the Company calculated the present value of $ for the office lease as of October
31, 2020.
As of October 31, 2020, the
right of use assets associated with future operating lease is as follows:
Total present value of right of use asset under lease agreement
|
|
$
|
150,496
|
|
|
|
|
|
|
Amortization of right of use asset
|
|
|
(79,759
|
)
|
|
|
|
|
|
Total right of use asset as of October 31, 2020
|
|
$
|
79,737
|
|
|
|
|
|
|
Less current portion due within one year
|
|
|
38,775
|
|
|
|
|
|
|
Long-term right of use asset
|
|
$
|
40,962
|
|
INNOVATIVE
DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended October 31,
2020 and 2019
Total amortization expense
related to the right of use assets under the verbal lease agreement was $36,173 and $22,174 for the years ended October 31, 2020
and 2019, respectively.
Future amortization
of the right of use asset as of October 31, 2020 is as follows:
2021
|
|
|
38,775
|
|
2022
|
|
|
40,962
|
|
Total
|
|
$
|
79,737
|
|
15.
LEASE LIABILITY
As disclosed in Note 14, the
Company entered into a verbal lease for office space prior to the year ended October 31, 2020 that is classified as a right of
use asset and lease liability.
As of October 31, 2020, the
lease liability associated with future payments due under the verbal lease is as follows:
Total present value of future lease payments
|
|
$
|
150,496
|
|
|
|
|
|
|
Principal payments made as of the year ended October 31, 2020
|
|
|
(79,759
|
)
|
|
|
|
|
|
Total right of use lease liabilities as of October 31, 2020
|
|
$
|
79,737
|
|
Total maturities of lease liability
as of October 31, 2020 are as follows:
|
|
Total future
|
|
|
|
|
|
|
minimum lease
|
|
Present value
|
|
|
|
|
payments
|
|
discount
|
|
lease liability
|
|
|
|
|
|
|
|
2021
|
|
|
|
42,000
|
|
|
|
3,225
|
|
|
|
38,598
|
|
2022
|
|
|
|
42,000
|
|
|
|
1,038
|
|
|
|
40,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
84,000
|
|
|
$
|
4,263
|
|
|
$
|
79,737
|
|
16.
SUBSEQUENT EVENTS
Subsequent to the period in October
31, 2020, the Company borrowed $200,000 from an individual. The note is secured by one of the Company’s patent. The term
of the loan is three years and the interest rate is 12% per annum. The loan is to be repaid in yearly installments with the first
payment of $66,666 to be paid on the 180th day from the date of the loan. Thereafter, each installment will be due and
payable one year from the date of the loan and each succeeding calendar until three years from the date of the loan year.